Sarbanes-Oxley Act, SOX, Sarbox 2002

Passed in July 2002, the Sarbanes-Oxley Act has reformed the world of accounting by introducing means of ensuring transparency and full disclosure. It is officially known as Public Company Accounting Reform and Investor Protection Act of 2002. The law was enforced after a series of corporate scandals related to accounting practices came to light and shook the world. The accounting loopholes and insufficient law structure that existed before could not prevent some corporate from indulging in unethical activities. Some of the companies which were regarded as one of the world's biggest and most trusted companies like Enron, WorldCom and Tyco were found guilty of hiding or producing false information in accounts. Investors lost millions of dollars and their assurance was taken aback. To bring faith in the system Congress passed this act to improve the accuracy and reliability of corporate disclosures.

The act was named after its sponsors Senator Paul Sarbanes and Michael G. Oxley. This act empowered Securities and Exchange Commission(SEC) to be able to act in the interest of the investors, protect whistleblowers and severely punish the law breakers. SOX made it mandatory for the public companies to make their financial statements more transparent, authentic, and certified by an officer.

Some of the features of SOX are:

• All business records must be retained for at least 5 years.
• CEOs and CFOs should sign on their companies’ financial reports (legally responsible)
• CEO’s and CFO’s compensation and profits must be disclosed.
• More stringent punishment for intentionally misstating financial statements .
• Internal audits and its certification by outside auditors made necessary.
• Audit firms should not have any other engagement with company like consulting.
• SOX 404 compliance: For publicly traded companies- establish internal financial controls and get them audited annually. Costs for this is in millions of dollars for big companies.
  

Excerpts from SOX:

Sec. 802(a)

"Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both."

Sec. 802(a)(1)
"Any accountant who conducts an audit of an issuer of securities to which section 10A(a) of the Securities Exchange Act of 1934 applies, shall maintain all audit or review workpapers for a period of 5 years from the end of the fiscal period in which the audit or review was concluded."

Sec. 802(a)(2)

"The Securities and Exchange Commission shall promulgate, within 180 days, such rules and regulations, as are reasonably necessary, relating to the retention of relevant records such as workpapers, documents that form the basis of an audit or review, memoranda, correspondence, communications, other documents, and records (including electronic records) which are created, sent, or received in connection with an audit or review and contain conclusions, opinions, analyses, or financial data relating to such an audit or review."